Why Ethiopia allows tax haven companies to produce gas & petroleum
BY ANDUALEM SISAY GESSESSE [OPINION] – At the time Ethiopian political crisis was at its pick, one major news appeared on one of the few private newspapers published in Addis Ababa. But it didn’t seem to get much of the attention of the public, whose worry at the time was the fate of Ethiopia as a nation. That news was about Ethiopia’s plan to commence petroleum production after one month.
The news quoted a “Chinese company” official. The reason I put the phrase – “Chinese company” is because in the current complex global business, the real beneficiary or owner of a company may not always be the person on the business license. Especially, if that company is incorporated in one of the dozens of tax havens, which are known for their secrecy, one has every right to be suspicious about the real beneficiaries of that company.
That is why I am also writing this piece. If I am entitled to my personal opinion, I think there is something fishy going on in relation to the company set to start gas and oil production in Ethiopia.
After reading the news entitled, ‘Poly-GCL to start extracting gas next month’ published on 5 May 2018 on The Reporter newspaper, I tried to get a meaning out of it. At first in fact I thought this could be one of the usual public attention diversion strategies of the government. Then I said to myself, when I get the time I will check who that company is and why at this point of crisis decided to start production, etc…
Then, the right time has come. After attending training for journalists by Tax Justice Network Africa on tax avoidance and fraud in Nairobi, Kenya last week, I went through the complex company structure of “the Chinese company”.
And below is what I found out, which I believe will help the Ethiopian government officials – I mean the reformist and the new administration to do further due diligence and revisit the details of the deal the country has made with the company.
My brief research on the offshore leaks database of the International Consortium of Investigative Journalists (ICIJ) shows that Poly Ethiopia Petroleum Company Limited is partly owned by Poly Petroleum Exploration and Production Company Limited, which is registered in one of the tax heavens – the British Virgin Island – home to half a million offshore companies. The other beneficiary of Poly Ethiopia Petroleum Company Limited is Shaanxi Yanchang Petroleum Group Company Limited.
The intermediary company involved in setting up Poly Ethiopia Petroleum Company Limited is called Joesun Investment Consulting Limited, which facilitated the incorporation of 165 companies in tax havens, according to Panama Papers.
But one of the things that makes me suspicious about the company is that, Poly Petroleum Exploration and Production Company Limited is also partly owned by a company named, Poly Central Africa Petroleum Company, which is incorporated on 8 October 2015 in British Virgin Islands. Poly Central Africa Petroleum Company is also incorporated Joesun Investment Consulting Limited.
Just to give a highlight for a stranger about the oil and gas potential and explorations of Ethiopia and help you understand how we reached where we are today you may read the next two paragraphs I took from Deloite 2016 research, ‘Oil and gas taxation in Ethiopia’.
Ethiopia has six basins which may contain commercial hydrocarbons: Ogaden, Abay, Gambella, Omo, Chew Bahir and Mekele. US Company Tenneco discovered two gas fields in the Ogaden Basin in the early 1970s: Calub (estimated at 2.7 trillion cubic feet [“tcf”]) and Hilala (estimated at 1.3 tcf). These have had a troubled history and are still [up to 2016] not in production. Following the overthrow of Emperor Hailie Selassie, Tenneco was expelled by the Derg in 1977 and further work was then carried out at the fields by a Soviet exploration company.
They, in turn, left Ethiopia following the fall of the Derg, and in 2007 Petroleum Production Sharing Agreements were awarded to Petronas. Petronas left Ethiopia in 2010 as a result of a portfolio rationalization exercise and the blocks were then awarded to a private Hong Kong-based company, PetroTrans. PetroTrans rapidly fell out with the Ethiopian government and is reported to be taking its dispute to international arbitration.
Meanwhile, local media reports that another Chinese company, Poly GCL Petroleum Investment Ltd, has signed new Petroleum Production Sharing Agreements for the blocks at the end of 2013.
Back to my conspiracy theory
Now that you at least know the controversies surrounding the specific oil and gas exploration and how Poly Petroleum finally show up, let’s go back to my opinion.
Now my question is after two years of the Petroleum Production Sharing agreement, who is likely to setup Poly Central Africa Petroleum Company in a tax haven and for what purpose?
Weather it is owned by Chinese or our corrupt officials, one thing is clear – it is definitely incorporated for the sake of tax avoidance.
You may think that I am too pessimist and a conspiracy theorist kind of person. I may be… But you better believe me and launch investigation about this deal.
In a country where we have been witnessing several scandals, ranging from transformation of endowment companies to private limited companies (PLC), to the vanishing of hundreds of millions of dollars supposed to establish 10 state sugar factories, and the abuses of state bank funds by a certain groups, I think it is normal to be skeptic and conspires theorist.
Who knows you [an independent and genuine team of special investigation, which will be directly reporting to the new Prime Minister] may find out that some of our corrupt officials could be the real beneficiary behind the curtain.
Otherwise I don’t see any other reason why Ethiopia allows a tax haven company to produce gas. I also don’t think that the institution in charge of awarding such contracts haven’t done due diligence about the company setup three years ago.
Better yet, it is important to see if Ethiopia benefits from taxes at all when it comes to oil and gas production. So, this has to be seen not only because the company is registered in a tax havens.
It also has to be seen in the face of “the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income” Ethiopia and China signed, well as the one Ethiopia inked with the Great Britain, which is in charge of about a dozen tax havens, including British Virgin Island.
The other issue is that Ethiopia has no specific law that addresses transfer pricing and related party transactions, a regulation that may help reduce the negative impacts of tax doggy companies on the tax income of the country and the overall economy.
This deal is likely to affect the tax income of Ethiopia from such companies coming from China or labeled Chinese companies though the real beneficiaries of the companies may be from anywhere in the world.
I thinking looking into this issue can also open the door for the Ethiopian government to revisit other mining deals and related transactions. We have seen recently that when the company engaged in oil exploration Uganda has transferred its business to another company, the tax authorities has caught the company and made it pay the tax the company was about to go away with.
In my opinion looking back, which company gets which deal? And how it has got it, is important. I believe such revisiting helps to find out if Ethiopia or the people have been really been benefiting from mining deals, be in terms of taxation, foreign currency generation or employment and make the remedies as soon as possible.
But most of all, those who exploited or allow the improper exploitation of the resources of the people have to be questioned and pay the price, if the country has to end injustice and move forward with transparency and accountability at all levels, as we hear from the new leadership of the country.
To understand how the person or nationality of the person on the trade license registered in secretive tax havens may not be actual beneficiary, I suggest looking at the video below prepared by the ICIJ, which among others involved in revealing the scandals of thousands of companies mentioned in Panama Papers and the like.
You may also check the database of ICIJ here to find more about which companies and individuals operating in Ethiopia are linked to tax havens.
By the way, there is nothing illegal about registering a company in a tax heaven. But they the companies are registered in tax havens where they actually don’t operate for the sole purpose of tax avoidance in the countries where they actually operate in makes them morally guilty and untrustworthy.
If a company is not trustworthy, whatever profits and taxes such companies declare must be investigated by an audit firm or tax authority or anti-financial fraud agency and even anti-corruption agencies.
By the way I just read the news that police is probing the former development bank chiefs, which is a very good step towards justice and accountability, even though who is investigating who is always my concern.